557965

research-article2014
EUR0010.1177/0969776414557965European Urban and Regional StudiesPavlnek

European Urban
and Regional

Article Studies

European Urban and Regional Studies

Whose success? The stateforeign 2016, Vol. 23(4) 571593

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DOI: 10.1177/0969776414557965

of the automotive industry in eur.sagepub.com

Slovakia

Petr Pavlnek
University of Nebraska at Omaha, USA; Charles University in Prague, Czechia

Abstract
Using the case study of Slovakia, this article considers the role of the state in the rapid growth of the automotive
industry in integrated peripheral markets of the global automotive industry. Although this growth has been mainly
driven by the investment strategies of automotive lead firms, the state has played an important role by accommodating
the strategic needs of foreign capital through neoliberal economic policies. In addition to secondary sources, the
empirical research is based on a 2010 survey of 299 Slovak-based automotive firms with a response rate of 44%
and on 38 on-site firm-level interviews conducted between 2011 and 2013 and one in 2005. The analysis draws
upon approaches in economic geography, international political economy and upon global value chains and global
production networks perspectives to argue that the successful development of the automotive industry in Slovakia has
been achieved at the expense of its overwhelming dependence on foreign capital and corporate capture. The article
considers the potential consequences of dependent industrial development for the domestic automotive industry and
its position in the international division of labor.

Keywords
Automotive industry, East-Central Europe, foreign capital, industrial development, Slovakia

Introduction
The state has played a key role in the industrializa-
tion of less developed countries (Kohli, 2004),
including the development of the automotive indus-
try (Dicken, 2011; Humphrey and Oeter, 2000). Its
crucial importance for the automotive industry was
most recently demonstrated in both developed and
developing countries during the 20082009 eco-
nomic crisis (Klier and Rubenstein, 2010; Stanford,
2010; Sturgeon and Van Biesebroeck, 2009; Van
Biesebroeck and Sturgeon, 2010). Along with
investment strategies of global automotive lead
firms, state policies have played an important role in
the rapid development of the automotive industry in
less developed emerging economies since the early
Corresponding author:
Petr Pavlnek, Department of Geography and Geology,
University of Nebraska at Omaha, 6001 Dodge Street, Omaha,
NE 68182-0199, USA.
Email: ppavlinek@unomaha.edu
572 European Urban and Regional Studies 23(4)
1000
900
Manufactured cars (in thousands)
800
700
600
500
400
300
200
100
0
Figure 1. Passenger car production in Slovakia, 1990-2013.
Source: Based on data from (OICA, 2014) and (ZAP, 2000).
1990s (Carrillo et al., 2004; Humphrey et al., 2000;
Humphrey and Oeter, 2000; Sturgeon et al., 2008).
The fastest growth took place in countries with rap-
idly growing new demand and potentially very large
domestic markets, such as China, India and Brazil
(Liu and Dicken, 2006; Liu and Yeung, 2008; Van
Biesebroeck and Sturgeon, 2010), and in integrated
peripheral markets that is, less developed coun-
tries located in peripheral areas surrounding tradi-
tional core regions of automotive production, such
as Mexico and East-Central Europe (ECE) (Layan,
2000; Pavlnek, 2002; Sturgeon et al., 2010).
Integrated peripheral markets have been typified by
hands off industrial policies, dependence on for-
eign direct investment (FDI) and by integration into
core-based production networks (Humphrey and
Oeter, 2000). Core-based lead firms invested heavily
in these peripheral regions in assembly operations
because of low production costs and geographic
proximity to large affluent core markets and also
because of their inclusion in large regional economic
blocs, such as the European Union (EU) and the
North American Free Trade Agreement. While the
role of lead firms in these processes has been empha-
sized and analyzed, much less attention has been
given to the role of state strategies beyond the provi-
sion of investment incentives, although exceptions
exist (e.g. Drahokoupil, 2008, 2009a; Humphrey and
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Year
Oeter, 2000; Liu and Dicken, 2006; Liu and Yeung,
2008).
The aim of this article is to analyze the role of the
state in the development of the automotive industry
in Slovakia, which represents an excellent example
of a peripheral country that has been integrated into
European automotive production networks since the
early 1990s. Driven by FDI inflows of 2.4bn in the
automotive industry between 1990 and 2012 NBS,
2013), the annual assembly of passenger cars
increased from less than 3000 units in 1993 to
980,000 units in 2013 (Figure 1). Slovakia became
the 19th largest producer of automobiles in the world
in 2012 and the largest producer of passenger cars per
capita (181 units per 1000 people in 2012) ( SARIO,
2013). FDI-driven export-oriented expansion of the
automotive industry contributed to rapid economic
growth, especially between 2000 and 2007 (OECD,
2012). Slovakia recorded the fastest GDP growth per
capita among the OECD members during 20012011
and it significantly narrowed the income gap relative
to the more developed half of the OECD countries
from more than 60% to almost 40% (Figure 2).
In this article, I seek to move beyond the uncritical
praise by the state, media, supranational organizations
and consulting firms of FDI-driven development of
the Slovak automotive industry (e.g. Ernst & Young,
2010; Jakubiak et al., 2008; SARIO, 2013) and
Pavlnek 573
GDP oer capita in PPP, thousands of
30
25
USD
20
15
10
Slovakia
Figure 2. GDP per capita in USD in purchasing power parity in OECD countries and Slovakia, 1995-2011.
Source: Based on data from (OECD, 2012).
provide a more critical reading of the role of the state
in these processes. I show that the states role was
instrumental in the growth of the Slovak automotive
industry. Although its post-1990 development has
been driven by FDI, I argue that the state played an
important role in making it possible by creating highly
favorable conditions for foreign capital in Slovakia. In
the process, the dependence of Slovakia on the exter-
nally controlled automotive industry has increased
sharply. By 2004, foreign capital controlled 97.3% of
the automotive industry, measured by a percentage of
turnover (Vliegenthart, 2010). As of 2012, 80% of
automotive suppliers were foreign-owned and 93.5%
of technologies were imported (Luptik et al., 2013;
ZAP, 2013). In 2012, the automotive industry
accounted for 26% of Slovak exports and 20% of its
imports (ZAP, 2013).
Theoretically and conceptually, this article draws
upon analyses of ECE in international political econ-
omy (e.g. Drahokoupil, 2009a; Shields, 2008), stud-
ies of external dependency and truncation in
economic geography (e.g. Britton, 1980; Dicken,
1976), and on global value chains (GVC) and global
production networks (GPN) perspectives (e.g.
Gereffi et al., 2005; Henderson et al., 2002).
Empirically, in addition to secondary sources, the
article uses data from a 2010 survey of 299 Slovak-
based automotive firms with 20 or more employees
OECD
which yielded a response rate of 44%, and from 38
on-site interviews conducted with Slovak-based
automotive firms between 2011 and 2013, plus from
a 2005 interview at Volkswagen (VW) Slovakia.
The article begins with a discussion of the state
and the development of the automotive industry
in ECE. The changing role of the state in the auto-
motive industry during the post-1993 independ-
ence period is then analyzed, followed by case
studies of the role of the state in attracting and
accommodating three foreign assembly firms:
VW, PSA Peugeot-Citron (PSA) and Kia. Based
on firm-level interviews, an evaluation of state
policies towards the automotive industry by for-
eign and domestic firms is then presented. The
limits of the stateforeign capital nexus for suc-
cessful economic development in Slovakia are
considered; and, finally, the main results are
summarized.
The state and the development of
the automotive industry in East-
Central Europe
Since the early-1990s, neoliberal export-oriented
strategies of economic development have become
the new orthodoxy in less developed economies,
including the former state socialist countries of ECE
574 European Urban and Regional Studies 23(4)
(Bohle, 2006; Gereffi, 2013; Gowan, 1995; Harvey,
2005). The automotive industry is a prime example
of the implementation of such strategies that are
based upon attracting large inflows of FDI to finance
and restructure existing industries, build new indus-
trial capacity and promote domestic automotive pro-
duction. Despite questions about the appropriateness
of automotive industry-centered strategies in con-
temporary economic development (Humphrey,
2000), countries around the world continue to lure
automotive transnational corporations (TNCs) to set
up new production within their territories (Liu and
Dicken, 2006). In this intensifying competition, ECE
countries have capitalized on the needs of core-based
TNCs to expand geographically into ECE markets
and increase their global competitiveness by offshor-
ing labor-intensive production to lower-cost periph-
eral locations. In addition to its market potential and
low production costs, ECE is attractive because of its
proximity to affluent Western European markets, its
inclusion in the EU, flexible labor policies, low labor
militancy, and weak labor unions. In other words,
ECE has become one of the latest spatial fixes
sought by TNCs for the absorption of surplus capital
(Harvey, 2006, 2010).
The state has played an important role in making
this spatial fix possible during ECEs transition from
state socialism to neoliberalism (Shields, 2008:
447). In the absence of sufficient domestic capital
and after the failure of national-oriented strategies of
the early 1990s (Drahokoupil, 2008), neoliberal
strategies of industrial development have prevailed
in ECE. Restructuring of the state through the pro-
cesses of transnationalization (Shields, 2004, 2008;
Vliegenthart, 2009) opened up national economies
for penetration by foreign capital. Some of the
domestic political elites, variously labeled as com-
prador administration (Baran, 1957), comprador
fraction of the bourgeoisie (Poulantzas, 1973),
comprador intelligentsia (Eyal et al., 1997), com-
prador class (Vliegenthart, 2010) or comprador
service sector (Drahokoupil, 2009b), aligned their
interests with those of foreign capital and gained
political influence, which they used to promote suc-
cessfull FDI-friendly policies across ECE. In other
words, they helped to translate the structural power
of transnational capital into tactical forms of power
that enabled agential power to work in sync with the
interests of the multinationals (Drahokoupil, 2009a:
3). By the late 1990s, ECE states had become com-
petition states (Cerny, 1997), which are typified by
state strategies that rely on foreign capital as a pri-
mary vehicle for increasing national economic
competitiveness and by adopting FDI-driven
industrialization and restructuring strategies
(Drahokoupil, 2008, 2009a, 2009b). ECE competi-
tion states have competed for mobile FDI by creat-
ing favorable conditions for the entry and operation
of TNCs in their national economies, including
offering various investment incentives, tax provi-
sions, education policies, and industrial relations.
These competition states are typified by inward
investment regimes (Phelps and Wood, 2006) or
investment promotion machines (Drahokoupil,
2008) that are subnational territorial coalitions which
ad hoc mobilize social actors at local, regional and
national scales, with the aim of attracting selected
foreign investors and promoting their interests in a
particular locality, region and country (see also
Phelps, 2000, 2008). Thus, FDI and industrial poli-
cies in ECE have been driven primarily by the
imperative to accommodate the needs of foreign
capital and, in particular, the needs of large strate-
gic (or flagship) investors, whose interests are rep-
resented by the comprador sector in domestic
politics. The goal of these policies has been to
improve or maintain a countrys competitive posi-
tion in transnational flows of FDI, important not
only for attracting new investments but also for sta-
bilizing existing ones. Although individual countries
might be attempting actively to shape their industrial
structure by attracting FDI into particular sectors of
the economy, they will only succeed if these sectors
are attractive to foreign TNCs and in line with their
transnational investment strategies.
The bargaining powers of states have declined,
especially in less developed countries, because of the
liberalization of FDI policies and certain controls over
their national economies being relinquished to supra-
national organizations (Phelps, 2008; Phelps and
Raines, 2003). The bargaining powers of ECE states
with vis a vis foreign TNCs with regard to FDI terms
have been further undermined by their small domes-
tic markets and intense competition from neighboring
Pavlnek 575
countries with similar factor endowments (see Liu
and Dicken, 2006). Automotive TNCs exploited this
relative weakness of ECE countries by engaging in
regulatory arbitrage, playing countries off against one
another with the aim of securing the best possible
terms for their investment (Kolesr, 2006, 2007).
Consequently, automotive TNCs were able to secure
exceptionally favorable terms of entry into the region
(Bartlett and Seleny, 1998: 320). Regulatory arbitrage
may lie behind the reduced economic benefits of FDI
for host economies because it can lead to corporate
capture of national and local institutions and
resources, in which the state and regional govern-
ments act in the context of an asymmetrical power
relationship with respect to foreign capital and, conse-
quently, end up serving the interests and needs of for-
eign TNCs at the expense of domestic firms and
populations (Phelps, 2000, 2008). In this situation, the
state provides resources to reduce the investment
costs of incoming flagship investors and tailors invest-
ment incentives to investors specific needs. Typically,
the state agrees to finance and build customized infra-
structure, such as highway links, railway terminals or
supplier parks; secures customized assembly and pro-
vision of land for greenfield production complexes;
and finances workforce training. Additional signs of
corporate capture include: state agencies, regional and
local politicians placing the interests of flagship inves-
tors above those of domestic firms and local residents;
flagship investors exerting disproportionate influence
over state economic, education and training policy-
making, to serve investors specific needs; the state
agreeing not to allow other investors to locate in the
proximity of a flagship investor, in order to reduce
competition for labor in the local labor market; and
few positive regional development effects of FDI,
beyond that of newly created jobs (Phelps, 2000,
2008). In the words of the UNCTAD (1998: 103):
When governments compete to attract FDI, there will
be a tendency to overbid The effects can be both
distorting and inequitable since the costs are ulti-
mately borne by the public and hence represent trans-
fers from the local community to the ultimate owners
of the foreign investment.
At the same time, however, the EU local content
regulations, combined with co-location imperatives
of assembly plants and suppliers in contemporary
modular assembly processes (Sturgeon and Lester,
2004), forced automotive lead firms to develop sup-
plier networks in ECE. Lead firms put pressure on
established foreign suppliers to follow them into
ECE and also forced the most capable domestic sup-
pliers to upgrade in order either to meet the lead
firms quality and timing requirements or be
excluded from supplier networks (e.g. Pavlnek,
2003; Pavlnek et al., 2009). Territorial embedded-
ness of foreign investors in host economies through
the development of supplier networks generates
potentially significant economic benefits, by (i)
increasing the value from production in host econo-
mies and (ii) by generating spillovers that might
increase the competitiveness of domestic firms
(Pavlnek and alov, 2016). For example,
Slovakia attracted 121 investments in new automo-
tive supplier plants between 1997 and 2009 and
Central and Eastern Europe as a whole attracted
1,258 (Ernst & Young, 2010).1 These potentially
large economic benefits of territorial embeddedness
make foreign-owned automotive assembly plants
extremely desirable in the eyes of national govern-
ments and increase their willingness to engage in
competitive bidding with other countries in order to
attract them.
However, the state-based competition over FDI in
ECE has been mostly of the low-road variety on
the basis of low wages, docile labour and low taxes,
which perpetuate an inability to upgrade to an eco-
nomic base of higher skill and higher wages
(Malecki, 2004: 1104). In 1997, Ellingstad (1997)
warned that a maquiladora syndrome might be
developing in ECE. According to Ellingstad (1997),
the maquiladora economy is typified by export-ori-
ented manufacturing, low wages that do not match
increases in productivity, and by worker productivity
and skills that are lower than in the home countries
of foreign investors. Export-oriented foreign-owned
factories often assemble high-tech, high quality
goods with a relatively high value-added from com-
ponents that are either imported or produced locally
by other foreign firms. Export-oriented manufactur-
ing is usually highly regionally concentrated and it
thus contributes to large regional development dis-
parities in maquiladora economies. Overall, the
maquiladora strategy promotes the development of
576 European Urban and Regional Studies 23(4)
50
45
40
35
U.S. dollars
30
25
20
15
10
5
0
Slovakia
Figure 3. Hourly compensation costs in manufacturing in Slovakia and Germany, 1996-2012.
Note: Compensation costs include direct pay, social insurance expenditures, and labor-related taxes.
Source: Based on data from (USBLS, 2013).
low-wage, low or medium-skill, low value-added
manufacturing with limited chances of upgrading in
the foreseeable future (Ellingstad, 1997: 9). Although
Bernaciak and epanovi (2010: 141) argued that
by the late 1990s, regional industry had largely
recovered from the maquiladora syndrome, a
number of indicators suggest otherwise, including
low real wages despite substantially increased pro-
ductivity, weak unions, high unemployment (14% in
Slovakia in 2013), a persistent wage gap between
ECE and Western Europe (Figure 3), imports of high
value-added components or their production by for-
eign-owned suppliers rather than domestic firms, the
weak development of higher value-added non-pro-
duction functions (Table 1), and the intensification
of uneven development because of FDI (Pavlnek,
2004).2 Nlke and Vliegenthart (2009) argued that
FDI-driven industrial development strategies have
increased ECEs external dependence on foreign
capital to such an extent that it has led to the emer-
gence of a dependent market economy as a distinct
variety of capitalism in ECE.
Economic geographers have analyzed the effects
of FDI on national and regional economies since the
1970s (e.g. Britton, 1980; Dicken, 1976; Firn, 1975;
Hayter, 1982). The early studies concluded that in
Year
Germany
addition to external dependency FDI-driven indus-
trial development has long-term structural costs for
less developed regions and countries in the form of
truncated development. Truncated firms are defined
as subsidiaries and branch plants, which rely on their
foreign based parent companies for various services
and functions and whose autonomy is circumscribed
by head-office dictates (Hayter, 1982: 277). Instead
of upgrading and catching up with more developed
economies, truncation tends to exacerbate the indus-
trial and technological underdevelopment of host
economies by developing routine capital-intensive
and low-skill industrial activities, while high-skill
and control functions remain concentrated in core
regions/countries (Britton, 1980; Hayter, 1982).
However, with the introduction of post-Fordist pro-
duction methods since the late 1970s, there has been
significant geographical reorganization of industrial
activities by TNCs (Dicken, 2011), including changes
in the relationship between TNCs and local areas
(Dicken et al., 1994). We need, therefore, to consider
the possibility that the conclusions of the truncation
literature may no longer be as relevant in the early
21st century as they were in the 1970s and 1980s.
FDI-driven dependent development often results
in rapid industrialization and fast economic growth.
Pavlnek 577

Table 1. Selected functions conducted in foreign-owned automotive industry subsidiaries in Slovakia.

Parent company Slovak No

abroad subsidiary answer

No. % No. % No. %

Decisions about what products 54 93.1 3 5.2 1 1.7
will be produced
Strategic planning 53 91.4 5 8.6 0 0.0
Investment decisions 50 86.2 8 13.8 0 0.0
Market research 50 86.2 8 13.8 0 0.0
Price setting for produced goods 49 84.5 9 15.5 0 0.0
Marketing of subsidiary products 48 82.8 8 13.8 2 3.4
R&D, design 46 79.3 8 13.8 4 6.9
Supplier selection 43 74.1 14 24.1 1 1.7
Sale and after-sale services 25 43.1 31 53.4 2 3.4
Product distribution 20 34.5 38 65.5 0 0.0
Organization of production 7 12.1 50 86.2 1 1.7
Accounting 7 12.1 51 87.9 0 0.0

Note: N = 58.
Source: 2010 survey conducted by the author.

Certain ECE economies, such as those of Slovakia
and Poland, have recorded some of the fastest rates
of economic growth in Europe since 2000 (OECD,
2013), which could be largely attributed to FDI-
driven extensive industrial development. In this
type of economic development, ECE became spe-
cialized in labor intensive manufacturing, while
control, R&D and other higher value-added func-
tions, such as marketing and branding, remained
concentrated in the global economic core. None of
the three large foreign-owned automotive assembly
plants in Slovakia have any R&D functions and their
other higher value-added functions are extremely
limited. Strategic planning, marketing, investment
decisions, supplier selection, product pricing and
distribution, sale and after-sale services are all
located abroad in the home countries of their foreign
owners (20112013 interviews). The 2010 survey of
299 Slovak-based automotive firms, conducted by
the author and which yielded a response from 133
firms, showed that a similar situation exists among
foreign-owned component suppliers in Slovakia.
Subsidiary functions and competencies were
reported by 58 foreign firms. The results, which are
summarized in Table 1, confirm that the vast major-
ity of foreign subsidiaries have limited
non-production functions and that most strategic
functions, such as strategic planning, investment
decisions, product decisions, marketing and R&D
are overwhelmingly concentrated abroad. In other
words, the majority of foreign firms in the Slovak
automotive industry do not engage in high value-
added activities that remain concentrated abroad
and, as such, they fit the notion of truncated branch
plants. The survey results thus suggest that external
ownership makes it less likely that higher value-
added activities will be developed in Slovak-based
foreign automotive firms, and are in line with the
conclusions of the truncation literature on FDI effects
in peripheral regions of developed countries (Britton,
1980; Dicken, 1976; Firn, 1975; Hayter, 1982).
Although high value-added functions and competen-
cies might gradually develop in some subsidiaries
over time (Amin et al., 1994; Dicken, 2011), the evi-
dence from both Western Europe and ECE suggests
that to date functional upgrading in foreign-owned
branch plants has typically been very limited and
uneven (Amin et al., 1994; Pavlnek and enka,
2011; Phelps, 1993). Furthermore, truncation is also
unfavorable for the development of a strong domes-
tic automotive sector because it necessarily implies
that foreign investment replaces or preempts
578 European Urban and Regional Studies 23(4)
economically viable indigenous development
(Hayter, 1982: 277).
In this mode of dependent development, value
enhancement and value capture tend to be low
(Smith et al., 2002). In the case of Slovakia, labor
costs account for only 7% of the total cost of auto-
motive assembly (Bella, 2013) and tax holidays
reduce further the potential for value capture. In this
respect at least the situation in ECE is reminiscent of
peripheral regions in developed countries that were
analyzed and reported in the literature on truncation.
It is not surprising that the truncation effects of FDI
in ECE were documented in the 1990s and 2000s
(Grabher, 1994, 1997; Pavlnek, 2004, 2012).
Consequently, the catching-up process of ECE
with the economic core and upgrading to a better
position in the European automotive industry divi-
sion of labor are likely to be limited, despite the
rapid FDI-driven industrialization of the 2000s.
GPN and GVC approaches in particular have
argued that successful regional and national eco-
nomic development can be achieved through the
active insertion of regions and countries into exter-
nally organized production networks and value
chains (Coe et al., 2004; Gereffi, 1999; Gereffi et al.,
2005; Henderson et al., 2002). For example, it has
been argued that automotive branch plants located in
peripheral regions are being transformed into per-
formance/networked branch plants that are embed-
ded in local economies, have greater operating and
even strategic autonomy and, as such, can gradually
upgrade their functions and position in GPNs
(Dawley, 2011; Pike, 1998). GVC and GPN perspec-
tives have emphasized the possibilities for upgrad-
ing in peripheral regions through the coupling of
local, regional and national assets with the strategic
needs of TNCs (Coe et al., 2004; MacKinnon, 2012).
The state plays an important role in building and
maintaining regional and national assets in the form
of particular labor skills, knowledge, regional insti-
tutions and FDI policies that attract foreign capital.
There is evidence from East and Southeast Asia sup-
porting these arguments (Yeung, 2009, 2013).
Nevertheless, Dicken et al. (1994: 4041) remind us
that the prospects for greater local embeddedness of
TNCs created by the new organizational forms
appear to be limited to a minority of favoured
places. Even performance plants located in periph-
eral regions have been susceptible to closure and
corporate rationalization (Dawley, 2007), which
suggests the continuing validity of the truncation
argument. In the context of the automotive industry
generally and of the ECE automotive industry spe-
cifically, the GVC/GPN perspectives seem to be
unduly optimistic because firm-level upgrading,
especially among domestic firms, has mostly been
limited to process upgrading (Pavlnek, 2012;
Pavlnek et al., 2009; Pavlnek and enka, 2011).
Empirical evidence from ECE and other less devel-
oped countries also points to the decreasing role of
domestic firms in automotive value chains, which
are increasingly dominated by foreign firms (Barnes
and Kaplinsky, 2000; Humphrey, 2000, 2003).
Examples of successful strategic couplings in the
ECE automotive industry are an exception rather
than a rule (Pavlnek, 2012), while the newly devel-
oped dependence on foreign capital and truncation
effects are widespread (Table 1).
A review of existing research thus suggests that
state industrialization strategies based on large
inflows of FDI are problematic because FDI repre-
sents a double-edged sword. It can lead to rapid
industrialization and economic growth in host econ-
omies but at the expense of truncation, foreign con-
trol and dependent development. An empirical
analysis of the role of the state in the development of
the Slovak automotive industry follows, which sup-
ports my argument about the crucial role of ECE
competition states in making the FDI-driven devel-
opment of the automotive industry possible, despite
their relatively weak bargaining position with for-
eign automotive TNCs.
The state and the automotive
industry in Slovakia after 1990
Development of the automotive industry in Slovakia
was limited before 1990. Final assembly was con-
centrated in Czechia, despite the construction of the
Bratislava Automotive Works (Bratislavsk auto-
mobilov zvody BAZ), which started in the early
1970s (Pavlnek, 2008; Studeniov and Uhrk,
2009). Throughout the early and mid-1990s,
Slovakia was not perceived as a
Pavlnek 579
favorable destination for foreign investors because
of the perceived uncertainty related to the establish-
ment of the new independent country, weak invest-
ment incentives and shifting privatization and FDI
policies mired in low transparency and corruption
(Jakubiak et al., 2008; Javorcik and Kaminski,
2004; Smith and Ferenkov, 1998). During this
period, the Slovak government pursued an inward-
oriented strategy of economic development that
supported large domestic firms and was hostile to
FDI (Drahokoupil, 2009a; Pavlnek and Smith,
1998). The failure of this policy to generate sustain-
able economic growth, combined with domestic
pressure from the emerging comprador sector and
external pressure from the EU, the International
Monetary Fund (IMF) and the World Bank to open
up to FDI (Medve-Blint, 2014), paved the way for
an alternative approach based on attracting large
FDI inflows (Drahokoupil, 2008).3 In its various
reports the IMF, for example, repeatedly urged the
Slovak government to speed up privatization and
open up to FDI in the late 1990s: Accelerated pri-
vatization of telecommunications and of other com-
panies held by the State would convey an important
message about the new governments open attitude
to foreign investors (IMF, 1998 cited in
Marcinin, 2000b: 309). In its report, prepared for
consultations with the Slovak government, the IMF
(1999) considered macroeconomic instability, high
rate of corporate income tax, the lack of tax incen-
tives compared to neighboring countries, and the
governments privatization policy that discrimi-
nated against foreign investors in favor of domestic
managerial groups, as the principal reasons for low
FDI in Slovakia. In 1999 the IMF stated further that:
For the revitalization of the banking and corporate
sectors it is most important to accelerate their
restructuring and privatization. Delayed addressing of
these serious economic issues would undoubtedly
threaten the economic stability of Slovakia and reduce
its chances for an early integration into Western Europe
(IMF, 1999; cited in Marcinin, 2000a: 335).
A shift away from the inward-oriented develop-
ment strategies promoting national capitalism and
the changing attitude to FDI was reflected in the
Program for the Development of the Automotive
Industry in Slovakia approved by the nationalist
government in July 1998 (Vestnk, 1998) just before
the administration was replaced by a reformist
(neo-liberal) government in October 1998, follow-
ing the September 1998 elections. The Program
defined the vision, strategy and goals of the develop-
ment of the automotive industry up to 2010. It set
three basic goals: (1) securing the supply of vehicles
necessary for the development of the Slovak econ-
omy, while achieving a positive trade balance with
automotive products; (2) increasing automotive out-
put and restructuring related industries, especially
the manufacturing, electronic, iron and steel, rubber
and plastic industries; and (3) increasing the integra-
tion of Slovakia in the global economy through the
automotive industry. Each of these basic goals had
specific targets attached. For example, the automo-
tive industry output was supposed to grow by 20%
annually until 2000, by 15% between 2001 and 2005
and by 12% between 2006 and 2010. The govern-
ment required the automotive industry to create
15,000 new jobs and invest 6080bn Slovak crowns
(US$1.7b2.3b), mainly through FDI (US$1.4b
1.8b) by 2010.4 The Program included detailed pro-
duction goals for individual producers, such as
trebling the output of VW Slovakia by 2010 and
attracting at least one additional passenger car
assembly plant of a global lead firm that would
assemble 100150 thousand units annually in
Slovakia. There were also annual production goals
for the assembly of trucks (2,0003,000 units), buses
(500800 units), light commercial vehicles (2,000
units) and the components industry, the output of
which was to quadruple by 2010. Domestic techno-
logical investment was intended to account for 15
20% of the total technological investment in the
automotive industry, with the rest to be secured
through FDI. Slovakia was to start exporting auto-
motive technologies mainly to other ECE countries
as well as developing and starting export business
services for the automotive industry (Vestnk, 1998).
Although the Program relied mainly on foreign
capital for its financing, it called for state financial
support of the automotive industry exports, employ-
ment, restructuring and regional development. It
stressed the importance of state incentives for for-
eign investors, including lower taxes and the removal
580 European Urban and Regional Studies 23(4)
of trade barriers. It also declared state support for
automotive R&D in Slovakia, labor force training
and educational programs to train the labor force for
the automotive industry, active seeking and attract-
ing foreign investors, and the development of infra-
structure and integrated information systems
(Vestnk, 1998). The Slovak Ministry of Economy
became responsible for the entire Program, which
was coordinated by the governments plenipotenti-
ary for the development of the automotive industry
and further advised by the Council for the
Development of the Slovak Automotive Industry.
During its annual evaluation of the Program, the
Slovak government specified tasks to be completed
by individual ministries in a given time period in
support of the Program. In other words, the state put
in place a battery of policies designed to develop the
automotive industry through FDI by global assem-
blers and component suppliers.
The goals set in the Program for the development
of the automotive industry could only be achieved
through large inflows of FDI, which required a radi-
cal opening of the domestic economy to foreign
capital. In 1999, the government approved a
Strategy of the support of FDI entry (Medov, the development of the Slovak automotive industry,
1999), which was a reaction to and emulation of the
generous system of investment incentives introduced
in Czechia in 1998 (Drahokoupil, 2009a). Investors
investing at least 5m (2.5m in regions with high
unemployment rates) in setting up new manufactur-
ing operations in Slovakia with at least 75% of for-
eign ownership were offered five years of tax
holidays. They were required to export at least 60%
of their output and could qualify for 50% lower taxes
on their profits for an additional 5 years provided
they invested an additional 5m (2.5m in regions
with high unemployment rates) (Medov, 1999).
The corporate tax rate was reduced from 40% to
29% and in 2003 the government introduced a 19%
flat-rate tax and an employer-friendly, flexible labor
code (Bohle and Greskovits, 2006; Duman and
Kurekov, 2012; Fisher et al., 2007). This radical
shift in the treatment of foreign TNCs by the state
was strongly influenced by the lobbying efforts of
various organizations on behalf of foreign capital
included in the comprador sector, such as the
American Chamber of Commerce in Slovakia, by
bilateral negotiations with foreign TNCs, and by the
introduction of a race to the bottom in tax regimes,
labor protection and investment incentives for for-
eign capital in ECE (Bohle, 2006).
Although the Program seemed to be very ambi-
tious when it was introduced in 1998, many of its
goals such as the employment, investment and
total output targets of passenger cars were achieved
much quicker than the government had anticipated.
This was the outcome of the extensive growth of the
automotive industry after 2000 that was driven by
large inflows of FDI that were strongly supported by
investment incentives (Figure 1). At the same time,
state support for the development of the indigenous
automotive industry was virtually non-existent.
While the pre-1998 state support targeted large
domestic enterprises in basic industries, such as pet-
rochemicals, chemicals, metals and the energy sec-
tor, and ignored the needs of small and medium
enterprises (SMEs) (Beblav, 2000), the post-1998
governments also failed to introduce any policy sup-
porting the development of domestic SMEs (Duman
and Kurekov, 2012).
In order to illustrate further the role of the state in
the next section provides short case studies of the
role of the state in attracting three passenger car
assembly plants to Slovakia after 1990: Volkswagen
(VW), PSA and Kia.
The competition state and
flagship investments by foreign
assemblers
VW Slovakia
Throughout the 1990s the development of the Slovak
automotive industry was closely linked to VW invest-
ment at BAZ. In 1991, VW proposed to assemble
30,000 automobiles annually at BAZ, produce gear-
boxes and reorganize the automotive supplier network
in Slovakia. The joint venture (JV) agreement was
signed in May 1991 and VW became the sole owner
of VW Bratislava in 1994, renamed as VW Slovakia
in 1999 (Studeniov and Uhrk, 2009; interview at
VW Slovakia, 14 June 2011). One of the most impor-
tant reasons why VW bought BAZ was the potential
Pavlnek 581

Table 2. Investment incentives provided by Slovakia for flagship investments by VW, PSA and Kia.

VW Slovakia PSA Slovakia Kia Slovakia

80% of BAZ sold to VW for
US$29m in 1991
Tax allowance granted in 1998
(31.2m in 1999)
Subsidies for the construction of
the components factory in the city
of Martin (9.6m 19982000)
Construction of one thousand new
apartments in the Bratislava region
for VW workers
Increase in the capacity of the
Devnska Nov Ves railway station
Highway connection to VW
Bratislava (330m)
Provision of land and infrastructure
for the construction of two
supplier parks (Lozorno and
Kster)
Investment incentives to expand
production (14.3m in 2009 and
long-term tax holidays)
Land for the factory site and its
infrastructure (152m)
Tax holidays
1,640 subsidy for each newly
created job
11.3m for worker training
Help with the recruitment of
workers
Help with the construction of
housing for workers
Establishment of a French
school in Trnava
Education geared towards the
needs of PSA at the Trnava
technical school
Direct state incentives (328m)
Highway construction to ilina
(700m)
1,750 subsidy for each created job
State-funded worker training
Construction of a new railway terminal
Reconstruction of the airport at Doln
Hriov
English language school for children of
South Korean employees
A new health center, training center
and police station in ilina
1,0001,200 new apartments in ilina
Luxury houses close to Bratislava for
South Korean managers
The Construction Law amended
The same incentives given to Hyundai
Mobis
No other assembler allowed to locate
within 100 km from the Kia factory

Sources: Zamkovsk (1999), Vagac (2000), VW (2013), PSA (2003) and Kia (2004).

to increase its cost competitiveness by developing
low-cost export-oriented production in Slovakia
based on large labor cost differences between
Germany and Slovakia (Pavlnek and Smith, 1998).
In the early and mid-1990s, Slovak labor costs were at
less than 10% of German labor costs. In 2011, the
average hourly compensation costs in the automotive
industry were still 79.4% lower in Slovakia than in
Germany (USBLS, 2013) (Figure 3). Despite the
claims that the advantage of cheap labor no longer
exists in the automotive industry (Bella, 2013), wage
differences between the core and periphery are the
key to North-to-South offshoring (Baldwin, 2013:
31) and automotive firms try to minimize increases in
wages and keep them as low as possible (Freyssenet
and Lung, 2000). VW Slovakia is no exception and
low wages continue to be extremely important with
regard to its competitiveness.
However, despite low production costs, the out-
put of VW Slovakia increased slowly to 41,000 cars
in 1997. VW demanded lower taxes as a precondi-
tion for increased production (Studeniov and
Uhrk, 2009). After taxes were reduced in the middle
of 1998, VW relocated the assembly of the Golf
Synchro from Germany to Slovakia. As the most
sophisticated Golf model, the Synchro required a
higher level of labor input than more standardized
Golf models and therefore benefited from the low
labor costs in Slovakia. The output of VW Slovakia
tripled in 1998 compared to the level in 1997. The
successful assembly of the Synchro led to further
production increases and by 2003 VW was assem-
bling 281,000 passenger cars in Slovakia (interview
at VW Slovakia, 14 June 2011). The state strongly
supported this growth by approving investment
incentives for VW and by subsidizing the location
of foreign suppliers in Slovakia, in particular
through the construction of supplier parks (Table 2).
In 1997, VW had only four direct and nine indirect
suppliers located in Slovakia (Javorcik and
Kaminski, 2004) and the vast majority of compo-
nents were supplied from abroad (Pavlnek and
Smith, 1998). By 2004, 17 VW principal suppliers
were located in two newly built supplier parks
(interview at VW Slovakia, 21 July 2005). In 2009
the state subsidized the expansion of production,
582 European Urban and Regional Studies 23(4)
which increased the production capacity to 400,000
units and added 1,500 jobs. With strong support
from the state, VW Slovakia thus successfully devel-
oped as a low-cost assembler within the VW corpo-
rate production network.
State policies towards VW Slovakia contributed
to the development of the competition state. By the
early 2000s, Slovakia was able to compete with
other ECE countries in attracting large FDI projects,
as demonstrated by the decisions of PSA and Kia to
build their assembly plants in Slovakia. Both invest-
ments illustrate the active role of the Slovak state in
the development of the automotive industry and its
willingness to engage aggressively in the race to the
bottom with its Central European neighbors over
flagship automotive investment projects.
PSA Peugeot-Citron Slovakia
The November 2002 announcement by PSA that it
would build a 700m assembly plant in ECE, mainly
because of 75% lower labor costs compared to France
(Schnwiesner, 2002), started a bidding war among
Czechia, Hungary, Poland and Slovakia. Eventually,
Hungary and Poland lost because of high labor costs
compared with Slovakia and also because of the poor
quality of the infrastructure at the proposed site at
Radomsko in Poland (Trend, 2003). Czechia was dis-
qualified because PSA was already building a JV fac-
tory with Toyota (TPCA) at Koln and also because
of the poor quality of infrastructure and unresolved
previous environmental liabilities at the proposed
factory site close to the city of atec (iDNES, 2003).
PSA chose the Slovak offer and its proposed Trnava
site. The total value of investment incentives was
limited by EU regulations to 15% of the original
investment. Slovakia offered 152m in the form of
the land for the factory site and its infrastructure, tax
holidays, a 1,640 subsidy for each newly created job
and 11.3m for worker training. The state also prom-
ised to help with worker recruitment, education
geared towards the needs of PSA at the Trnava tech-
nical school, the construction of housing for workers
and the establishment of a French school in Trnava
(PSA, 2003). The combination of investment incen-
tives, low labor costs and high unemployment rate in
the Trnava region (around 13%) were the most
important factors favoring Slovakia, in addition to
Trnavas automotive tradition, well developed infra-
structure and its proximity to the capital Bratislava
(Table 2). At the time of negotiations, the government
did the maximum to accommodate the wishes and
needs of PSA (interview at PSA Slovakia, 17 June
2011).
Kia Slovakia
The Slovak competition state was the most aggres-
sive in attracting an investment by Kia of US$1.5bn.
In November 2002 Hyundai top management began
to negotiate with politicians of Czechia, Hungary,
Poland and Slovakia but kept them guessing about
its selection process. In August 2003 it was reported
that the decision about the factory location would be
made, the choice being either Hungary or Czechia,
with Czechia being the frontrunner (Kremsk,
2003). At that point, the Slovak minister of Economy
traveled to South Korea to present in person a new
package of investment incentives to the management
of Kia, an offer which was impossible to refuse
according to a highly ranked former official at the
Slovak Ministry of Economy (Kolesr, 2007: 59).
Kia obviously used the late Slovak offer to attempt
to obtain bigger incentives from Hungary and
Czechia. Both countries complained that the size of
incentives sought by Kia violated EU and national
regulations and exceeded the expected benefits of
the investment (Kolesr, 2007; Pavlnek, 2008). This
suggests that Slovakia was overbidding and ended
up paying too much for the investment.5 Kia eventu-
ally selected Slovakia on 2 March 2004. The size of
the investment incentives was the decisive factor, in
combination with low labor costs and low labor mili-
tancy (Table 2). Slovakia simply provided every-
thing Kia asked for (Kolesr, 2006, 2007), including
promises that the state would not change laws for the
duration of the investment in such a way that would
endanger economic benefits of the state support for
Kia, would not change its tariff policy and defend
the investment incentives for Kia with the European
Commission and defend Kias interests in any poten-
tial dispute (Kia, 2004). At the same time, Kia was to
receive all of the incentives, even if it did not com-
plete all of the investments listed in the contract, and
Pavlnek 583
Slovakia had no right to demand any additional
investment or return of any investment incentives
(Kia, 2004). The contract was thus extremely one-
sided, suggesting a very asymmetrical power rela-
tionship between Kia and the state, and it represents
an example of corporate capture (Phelps, 2000,
2008).
In 2005, Slovakia won another regulatory arbi-
trage over the 500m investment by South Korean
Hankook Tire by offering 105m or 21% of the total
value of the investment. In this case, however, the
government did not approve the investment agree-
ment after strong criticism from Slovak entrepre-
neurs and politicians that the country would be
paying too much (90,000) for each newly created
job. Slovakia then offered lower incentives (25,000
per job or 6% of the total value of the investment),
which Hankook refused and, instead, built the fac-
tory in Hungary, which offered 56m in direct incen-
tives (12% of the value of the investment) (Kolesr,
2006). The case of Hankook Tire suggests three
important conclusions. First, investment incentives
do matter, despite the fact that TNCs and competi-
tion states tend to downplay their importance, com-
pared to other factors, in location decisions. The size
of investment incentives was obviously the most
important factor in the final choice made by Hankook
Tire between Slovakia and Hungary. Second, the
Slovak competition state had reached its limit with
the Kia investment and the state recognized that
attracting FDI at any cost might be counterproduc-
tive. Third, states can ultimately limit the power of
TNCs and the comprador sector on their territories
but often at the expense of foreign capital exit.
Beyond assemblers: state
policies from the perspective of
component suppliers
As can be seen, VW, PSA and Kia benefitted signifi-
cantly from investment incentives and therefore it is
not surprising that they evaluated the state automo-
tive industry policy positively during 20112013
interviews. In addition to investment incentives,
they stressed the importance of the flat tax and the
adoption of the Euro. The assembly companies,
together with the OECD (2012), would like to see
the creation of as flexible labor markets as possible
and the restructuring of the education system so that
it would reflect better the market demand for labor
(interviews at VW Slovakia, Kia Slovakia and PSA
Slovakia on 14, 16 and 20 June 2011). However, it
has been argued that the state offered large invest-
ment incentives to foreign TNCs at the expense of
tax payers and SMEs (Bohle and Greskovits, 2006;
Zamkovsk, 2001). Indeed, after 1998, when
Slovakia began to vigorously compete for automo-
tive FDI, the state withdrew from the welfare system
and from supporting domestic firms (Duman and
Kurekov, 2012), spending on education in Slovakia
has been one of the lowest among the OECD coun-
tries (OECD, 2013), and state support for domestic
research has been erratic.6
Therefore, this article looks next beyond large
TNC assembly companies in order to gain a broader
perspective on how the Slovak-based automotive
firms evaluate state policies concerning the auto-
motive industry. It draws on 38 on-site interviews
with automotive firms conducted in Slovakia
between 2011 and 2013 with 15 domestic-owned
(henceforth domestic) firms and 23 foreign-owned
(henceforth foreign) firms, including VW, PSA and
Kia (Figure 4). The firms interviewed comprise a
representative sample selected from the database of
299 Slovak-based automotive firms in terms of
size, ownership and position in the supplier hierar-
chy. The interviews were conducted with directors
or top managers and included various questions
about the operation and development of automotive
firms in Slovakia. Foreign firms were asked
whether the state economic and industrial policies
helped them develop, or at least maintain, the stra-
tegic asset which led them to invest in Slovakia.
Domestic firms were asked a similar question:
whether the state economic and industrial policies
helped them improve or at least maintain their com-
petitive advantages. The results are summarized in
Table 3.
Of the 33 answers, eight respondents (24%) evalu-
ated the state policy towards the automotive industry
positively, 20 (61%) negatively, and five evaluations
(15%) were neutral, highlighting both positive and
negative perceptions of the state policy. Of the 12
domestic firms who replied to the question, three
584 European Urban and Regional Studies 23(4)

Kia Slovakia POLA

ND

IA
H
C
E
Z
C
ilina
PSA Peugeot Citron Slovakia

Trenn
Preov

E
AIN
Bansk Bystrica
AUSTRIA

Koice

UKR
Trnava
Nitra

Number of employees
Domestic ownership
Bratislava

Foreign ownership
RY
Volkswagen Slovakia N GA
HU
Less than 50

50 - 249
Divided highway
NUTS 3 region boundary More than 249
0 100 km
Nitra Center of NUTS 3 region Assembly plant

Figure 4. The location of interviewed automotive firms in Slovakia.

Source: Author.

(25%) viewed the effects of state economic policies for domestic firms. Domestic firms might be better
positively and nine (75%) negatively. Among foreign accustomed to the existing quality of the local labor
firms, five of 21 responses (24%) were positive, 11 force and, therefore, do not perceive it to be a major
(52%) were negative and five (24%) were neutral. A problem. Respondents complained about difficulties
less critical view of state policies by foreign com- encountered in finding skilled workers on the labor
pared to domestic firms could be attributed to the fact market and the lack of practical skills possessed by
that many foreign firms strongly benefited from graduates from state schools at all levels. Quotes
investment incentives, which some firms appreci- from four different interviews highlight the prob-
ated, while criticizing other aspects of state policies. lems felt by foreign firms:
In many cases, however, foreign firms failed to men-
tion incentives and emphasized negative aspects of We need a high share of skilled workers for our
state policies. operations, and I am not talking about operators, but
Table 3 highlights the positive and negative views technicians and engineers. Here, I need more brains,
on state economic and industrial policies expressed more people thinking how they can better perform,
by those interviewed in addition to different views improve processes and machines. And I am struggling
with that. And that are the two factors my parent
expressed by foreign and domestic firms. Automotive
company needs to be successful in Slovakia. Definitely
firms were concerned most about the quality of the it would be preferable to get it locally, to start with the
Slovak labor force and the failure of the state to edu- base where people are trained, where they have the
cate the workforce adequately in order to satisfy the automotive industry spirit. But this is not the case
needs of automotive firms. The weak education sys- (interview with CEO of foreign firm, 23 June 2011).
tem was highlighted by 43% of foreign firms and
19% of domestic firms, suggesting that the quality of The problem is the support from the government. It is
the workforce was a bigger problem for foreign than very formal and difficult to follow. The government is
Pavlnek 585

Table 3. Evaluation of state economic and industrial policy by automotive firms in Slovakia, 2011-2013.

Total answers % Foreign % Domestic %

Negative
Weak educational system 12 32.4 9 42.9 3 18.8
Inflexible labor laws 4 10.8 3 14.3 2 12.5
Investment incentives for large 3 8.1 1 4.8 2 12.5
foreign investors
High taxes 3 8.1 1 4.8 2 12.5
Bureaucracy 2 5.4 1 4.8 1 6.3
No help to small firms 1 2.7 1 4.8 0 0.0
Euro 1 2.7 0 0.0 1 6.3
Corruption 1 2.7 0 0.0 1 6.3
Positive
Investment incentives to large TNCs 5 13.5 5 23.8 0 0.0
State subsidies for specific projects 4 10.8 0 0.0 4 25.0
of domestic firms
Euro 2 5.4 2 9.5 0 0.0
Stable country 1 2.7 1 4.8 0 0.0
Highway construction 1 2.7 0 0.0 1 6.3
No opinion/no influence/no answer 6 16.2 2 9.5 4 25.0

Notes: Number of firms included: 38. Each firm could list more than one answer.
Source: 20112013 interviews.

not providing the conditions we need. We have
problems to find enough employees, the unemployment
rate is very low, especially in this area, in Bratislava
and it is the same for Koice. More importantly, in my
opinion, the labor force training is not good in Slovakia,
the training after school, so that they [young workers]
would have the training in factories and not [just] the
theoretical training. I would pay for that. And that is
missing here (interview with CEO of foreign firm, 22
June 2011).
A long-term problem of the Slovak education system is
that it does not reflect labor market demand. What is
missing here are technically-oriented workers with
university degrees, and, of course, workers with the
vocational and high school technical training. The
existing demand is not absolutely covered Certainly,
we feel that the education system is not adequately
supported by the government (interview at a vehicle
assembly firm, 22 June 2011).
The government should be really investing in the
qualification of students, qualification of workers, or it
will be a mess. The problem is really, what is the
benefit of purchasing from Slovak companies today? I
can buy cheap products somewhere else but I cant find
good products here (interview with CEO of foreign
firm, 23 June 2011).
Increasing labor shortages in the rapidly growing
automotive industry forced the government to
restructure the state run system of vocational train-
ing and initiate changes in the structure of educa-
tional programs in state universities in the mid-2000s.
The government argued that universities must per-
manently adjust their curricula to the needs of the
automotive industry and closely cooperate with the
industry (SEM, 2005). This quotation implies cor-
porate capture in the area of education and training
policy-making, but no positive outcomes of these
state efforts were acknowledged by automotive
firms during the 20112013 interviews. Thus,
despite corporate capture, the Slovak state has so far
been unable to satisfy the needs of foreign TNCs in
the area of educational policy and labor force train-
ing that are essential for their continuing success in
Slovakia and for the potential upgrading of the
Slovak automotive industry.
The second most cited criticism of state policies
in Slovakia was the perceived inflexible labor law,
586 European Urban and Regional Studies 23(4)
especially in terms of hiring and firing workers
according to the momentary needs of firms, and the
inability of firms to use short-term employment con-
tracts. Additional negative views included the sup-
port for foreign investors at the expense of domestic
firms, the strong Euro, which was undermining the
competitiveness of domestic products in foreign
markets, high and rising taxes, and corruption.
Among the positive aspects of state economic and
industrial policies, foreign firms appreciated invest-
ment incentives most, while several domestic firms
highlighted the importance of state subsidies for
their specific projects. Two respondents emphasized
the importance of the Euro for their firms (Table 3).
Limits of the state-foreign capital
nexus
The long-term goal of the state is to improve
Slovakias position in automotive GPNs through
industrial upgrading. It should be achieved through
the development of automotive R&D (SEM, 2005),
which seems to be a typical approach towards the
automotive industry in less developed economies.
As Humphrey and Oeter (2000: 55) argued govern-
ments expect to generate investment and employ-
ment in labour-intensive activities in the short term,
and hope that eventually higher-skilled jobs will also
be created.
Firm-level interviews confirmed that Slovakia is
attractive for the FDI-driven development of R&D
activities because of its low R&D labor costs (2011
2013 interviews). However, the limited supply of an
R&D labor force is viewed as a major constraint. A
director of the foreign-owned supplier of plastic
parts in Slovakia argued during an interview on 23
June 2011, we [foreign investors] are all struggling
with [low] technical competencies and knowledge of
university graduates. More importantly, given the
overwhelming dependence of the Slovak automotive
industry on foreign capital, the state effort to develop
strategic automotive R&D in Slovakia is likely to
succeed only if it is in line with the strategic need of
automotive TNCs. To date, automotive lead firms
have engaged in very limited internationalization of
their R&D into ECE (Pavlnek, 2012). Given these
constraints, the development of larger-scale and
strategic automotive R&D, beyond more routine
R&D, is likely to be difficult to achieve in Slovakia.
Industry-financed expenditures on R&D decreased
in Slovakia from 0.65% of GDP in 1995 to 0.2% of
GDP in 2010 (OECD, 2013) and Slovakia fell fur-
ther behind many advanced and emerging countries
because its industrial R&D investment did not keep
up with the extensive growth of automotive produc-
tion during the 2000s.
The dependence of the development of the auto-
motive industry in Slovakia on the strategic needs of
foreign TNCs is obvious from the fact that the annual
production targets specified by the government in
1998 (Vestnk, 1998) for the assembly of trucks,
buses and light commercial vehicles have not been
achieved. This illustrates that the state policy has
only been successful to the extent that it has met the
strategic needs and goals of large automotive TNCs.
High volume production of passenger cars and labor
intensive assembly of special models in particular
could benefit from the combination of a cheap labor
force and investment incentives to develop low-cost
production in integrated peripheral markets. To date,
automotive TNCs have not shown any interest in the
assembly of trucks, buses and light commercial
vehicles in Slovakia.
Superficially, state policies for the development of
the automotive industry in Slovakia appear to be
extremely successful. FDI in the automotive industry
has contributed strongly to capital formation, exports,
the balance of payments and employment. For exam-
ple, in 2012 the narrowly defined automotive indus-
try (NACE 29) directly employed 60,828 workers
(compared to 6,000 in 1993) and it generated an addi-
tional 140,000 jobs indirectly (Luptik et al., 2013).
However, despite the FDI-driven economic growth,
the unemployment rate has remained one of the high-
est among OECD countries, and the concentration of
automotive FDI in western Slovakia, where 74% of
all automotive firms are located, has contributed to
uneven development. As of 2011, Slovakia recorded
the highest regional inequalities at the TL2 level
among OECD countries (OECD, 2012). It is also
questionable to what extent large investment incen-
tives contribute to self-sustaining growth (Amin et
al., 1994). More importantly, this growth has been
achieved at the expense of subordinating state
Pavlnek 587
policies and decision-making to those of foreign
capital. Bella (2013) has argued: Volkswagen and
Kia do not care about the enforceability of law or the
administrative maze [in Slovakia] because any gov-
ernment minister is as far away from them as the
nearest phone and they manage to negotiate a service
from the state they need. State industrial policies
have been driven by the needs of foreign capital,
resulting in foreign-capital dependent development
(Nlke and Vliegenthart, 2009) and corporate capture
(Phelps, 2000), in which automotive lead firms
achieved disproportionate influence over govern-
ment decision making and its economic policies.
Conclusion
There is no doubt that Slovakia has experienced
extremely successful growth in the automotive
industry when measured by its rapidly increased out-
put and exports. This article has demonstrated that
the state and its policies concerning foreign capital
have played an important role in this growth, by
opening the domestic economy to FDI and by com-
peting successfully for large FDI projects with gen-
erous investment incentives and low taxes. It has
also illustrated the power of automotive lead firms to
achieve the best possible investment terms from the
states through regulatory arbitrage among countries
with similar factor endowments.
The development of extensive spillovers from for-
eign to domestic firms, which would drive the
upgrading and development of a strong domestic
automotive sector, might justify FDI-driven industri-
alization policies and large state expenditures spent
on attracting foreign lead firms. At present, the lack
of available data makes it impossible to evaluate the
extent of spillovers in the Slovak automotive industry
but the spillover effect on domestic companies in the
[automotive] sector is likely to be very limited
(ipikal and Buek, 2013: 479). Experience from
other integrated peripheral markets, such as Mexico,
suggests that the development of capabilities of local
suppliers is a long-term process that takes decades to
come to fruition (Sturgeon et al., 2010). Furthermore,
the current configuration of the global automotive
industry has not been favorable with regard to the
extensive development and upgrading of domestic
firms beyond process upgrading (Barnes and
Kaplinsky, 2000; Humphrey, 2000, 2003). In other
words, a strong development of the domestic auto-
motive industry that would justify high levels of state
expenditure on attracting foreign firms, reduce the
dependence of the Slovak automotive industry on
foreign capital, and stabilize the supplier network in
Slovakia, will be difficult to achieve. The future suc-
cess of the automotive industry in integrated periph-
eral markets, such as Slovakia, will continue to
depend on FDI and the transfer of foreign technol-
ogy. However, the wage-competitiveness of Slovakia,
its distinct advantage in the 1990s and early 2000s,
has been eroded as Central European currencies
devalued during and after the 20082009 economic
crisis (OECD, 2012) and Slovakia has increasingly
been threatened by relocation of the most cost-sensi-
tive labor intensive activities to lower-cost countries
(Pavlnek, 2015).7
Firm-level interviews suggested that long-term
state investment in higher education and vocational
training is important for maintaining and improving
the competitiveness of Slovak-based automotive
firms and it is crucial for the development of higher
value-added functions in both foreign subsidiaries and
domestic firms. Because local value creation is based
on high knowledge activities stemming from both
domestic and foreign firms, the development of these
competencies would help Slovakia upgrade its posi-
tion in automotive GPNs from being a predominantly
automotive industry subcontractor based on cheap
labor to a knowledge-based automotive producer with
innovative globally-oriented foreign and domestic
firms. As can be seen, however, while the state has
been willing to offer generous incentives to foreign
firms to invest in Slovakia, its investment in voca-
tional training and higher education has been inade-
quate to meet the labor needs of automotive firms.
The state support of R&D and of the development of
innovative domestic firms has also been inadequate.
To date, the state has mainly pursued quick, FDI-
based policy solutions rather than a long-term policy
focusing on the development of strategic assets that
could attract FDI in higher value-added functions.
External control and dependence on foreign capital
and technology represent the greatest weaknesses of
the FDI-driven industrialization. Overwhelming
588 European Urban and Regional Studies 23(4)
foreign ownership means that ultimate decisions
about the industry are made abroad by TNC head-
quarters in the context of their global operations.
Sturgeon et al. (2010: 232) have recently argued with
respect to Mexico: Clearly, the fate of an [automo-
tive] industry in a small, regionally embedded country
like Mexico is tied to factors that lie largely outside
the control of the state or of local firms. To a large
extent state industrial policies in Slovakia have been
subordinated to the needs of foreign capital, leading to
corporate capture, which may limit the abilities of the
state to pursue independent industrial development
policies. Large investment incentives and low corpo-
rate taxes undermined the ability of the state to finance
adequately domestic research, education and the sup-
port of domestic firms. Ultimately, therefore, the rapid
development of the automotive industry in Slovakia,
ECE as a whole, as well as other integrated peripheral
markets, is to be attributed to a successful spatial fix
by global automotive lead firms. The rapidly increased
automotive output and exports tell us more about the
successful offshoring of automotive technologies and
production models by German, French, South Korean
and other foreign firms to Slovakia than they do about
the capabilities of the domestic automotive industry
(Baldwin, 2011). Based on the experience of other
peripheral regions, it is unlikely that foreign lead
firms will develop higher value-added functions to a
significant extent in Slovakia. In the long term, it is
likely that value transfer in the form of profit repatria-
tion by foreign firms will exceed the value of invested
foreign capital, and the profit-seeking behavior of for-
eign firms will not necessarily be aligned with long-
term state development goals. For example, because
foreign automotive firms have been most interested in
low-cost production in Slovakia, they will be inter-
ested in maintaining the wage gap between Slovakia
and Western Europe; while the state should strive to
close this gap in order to increase the standard of liv-
ing of its population. In such a situation, it will be dif-
ficult for Slovakia and other ECE countries to improve
substantially their peripheral position with regard to
the division of labour in the European and global
automotive industry and join the core areas of the
automotive industry in order to benefit fully from the
rapid FDI-driven development that has taken place
since the early 1990s.
Acknowledgements
The author wishes to thank the editor and two anonymous
referees for their comments on an earlier version of this
article. I am grateful to Pavol Hurbnek and Jan enka for
help with organizing and conducting company interviews
in Slovakia. I acknowledge the help of Jan enka with the
administration of the company survey. I also want to thank
Karel Hostomsk for preparing the map.
Funding
This work was supported by the Czech Science
Foundation [Grant Number 13-16698S].
Notes
1. In addition to ECE, Central and Eastern Europe
includes the European countries of the former Soviet
Union (the Baltic States, Belarus, Moldova, Russia
and Ukraine).
2. The average monthly wage in the Slovak automotive
industry was 992 in 2012 (Luptik et al., 2013). A
CEO of a foreign firm that has produced in Slovakia
since 1993 remarked: We are here just because of
[low] wages (interview on 14 June 2011). According
to OECD (2013: 27), the domestic value added con-
tent of Slovak exports is very low by international
comparison.
3. Slovakia signed the European Association Agreement
in October 1993 (effective on February 1, 1995),
applied for EU membership on 27 June 1995, became
an EU member on May 1, 2004, and adopted the Euro
currency on 1 January 2009.
4. All conversions of the Slovak koruna used in this arti-
cle are based upon official exchange rates for a par-
ticular year published by the Slovak National Bank
at http://www.nbs.sk/en/statistics/exchange-rates/
en-kurzovy-listok.
5. Slovakia paid US$86,000 per job created by Kia,
compared to US$50,000 per job created by PSA
Slovakia, US$48,000 by Hyundai in Czechia and
US$37,000 by TPCA in Czechia (Kolesr, 2007).
6. The Slovak Science Foundation (Agentra na pod-
poru vedy a vskumu) had to cancel general calls for
proposals in 2003, 2008, 2009 and 2013 because the
national government did not allocate any money for
basic research in the national budget. In 2011, financ-
ing of successful projects was cut by more than 50%
(Hajduch, 2014).
7. By 2012, Slovak hourly compensation costs in man-
ufacturing (US$11.30) exceeded those of Poland
Pavlnek 589
(US$8.25) and Hungary (US$8.95) and were closing
in on those of Czechia (US$11.95) (USBLS, 2013).
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